American International Group Inc., the largest commercial insurer in the U.S. and Canada, will get at least $650 million in a settlement with Bank of America Corp. as the second-biggest U.S. bank seeks to end liability for faulty mortgages.
The deal covers home loans on which the insurer took losses and also entitles it to a share of what Bank of America pays to investors as part of a Countrywide repurchase settlement, New York-based AIG said today in a statement.
Bank of America said today second-quarter profit declined 43% as it spent $4 billion to cover mortgage-related legal expenses. The Charlotte, N.C.-based bank has pushed to resolve liabilities that have cost it at least $55 billion since the financial crisis, most inherited from its 2008 purchase of Countrywide Financial Corp.
The bank won court approval in January of an $8.5 billion settlement ending claims by investors in more than 500 mortgage-securitization trusts. AIG and other objectors asked the court to reject the deal, which it said resolved claims for pennies on the dollar while investor losses totaled more than $100 billion.
The AIG settlement was covered by litigation reserves as of June 30, Bank of America said today in a statement.
"Bank of America has now resolved approximately 95% of the unpaid principal balance of all RMBS as to which RMBS securities litigation has been filed or threatened for all Bank of America-related entities," the company said, referring to residential mortgage-backed securities.
AIG took housing-related losses on bonds that it purchased for its investment portfolio and loans that it backed through its derivatives unit and mortgage-guaranty subsidiary. AIG received a bailout in 2008 that swelled to $182.3 billion after the company was overwhelmed by losses tied to subprime loans. The insurer repaid U.S. taxpayers in late 2012.
AIG sued Bank of America and Countrywide for $10 billion in damages in 2011, claiming it was misled into thinking the bank’s residential mortgage-backed securities were issued according to underwriting guidelines that the bank had long abandoned.
Countrywide Financial, based in Calabasas, Calif., was the biggest U.S. residential home lender before the collapse of the housing market, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The bulk of them were sold to investors as mortgage-backed securities.